1. W ITHHOLDING OF LES ALLOCATIONS : PRESENTATION TO THE S ELECT C OMMITTEE ON APPROPRIATIONS For an Equitable Sharing of National Revenue 13 th May 2015

2. P URPOSE OF THE S UBMISSION The Commission is making this submission on the basis of Section 3 (1) and (2) b (i) and (ii) of the FFC Act of 1997 as amended The purpose of this submission is to apprise the Committee on the views of the Commission with respect to withholding of the Local Government Equitable Share (LES) allocation by National Treasury for municipalities that have not prioritised or persistently defaulted on debt they owe to Eskom and Water Boards Presentation on Withholding of the LES to municipalities

3. B ACKGROUND On 19 February 2015 a judgement in the Free State High Court delivered a guilty verdict on a Matjhabeng Municipality Manager for persistently non-complying with court orders To avoid such disputes playing out in court, on 6 March 2015, the National Treasury issued a circular on its intentions to withhold the LES allocations for Municipalities that are habitually defaulting on Eskom and Water Boards debts Subsequently National Treasury wrote to municipalities threatening to transfer their LES allocations directly to Water Boards and Eskom in lieu of what they owe Eskom and Water Boards Presentation on Withholding of the LES to Municipalities

4. T HE L EGAL BASIS FOR THE LES WITHDRAWAL Constitution (Section 216) Section 216 of the Constitution allows National Treasury to stop transfers to municipalities: Section 216 (1) of the Constitution provides that this can be done in the event of gross misconduct in the form of serious or persistent non-compliance with measures specified in In this case non-compliance means non-payment of the Eskom debt within 30 days Enabling Legislation The MFMA in Section 38-40, allows National Treasury to take punitive measures in the form of stopping allocations if there is persistent non-compliance with the Division of Revenue Act (2015) Division of Revenue Act (2015) Section 17 and 18 of the Division of Revenue Act (DoRA) of 2015 and subsequent regulations prescribed in

5. W HAT IS AT S TAKE ? What is at stake is the temporary disruptions on service delivery. The municipalities are responsible for service delivery and rely albeit differently on the LES. Presentation on Withholding of the LES to Municipalities

6. W HAT IS AT S TAKE ? THE E SKOM AND W ATER B OARDS D EBT Presentation on Withholding of the LES to Municipalities Municipal debt to Eskom as at November 2014 is shown in the figure below Interestingly, the “current” municipality debt of R 4.88 billion for November was less than bulk electricity sales of R 5 billion for the same period

7. D EBT B URDEN CONT ’ D. Presentation on Withholding of the LES to Municipalities The major debtors to Eskom were municipalities in Gauteng, Free State and Mpumalanga provinces For arrears debt, municipalities in Mpumalanga, Free State and North West top the list. Municipalities in these three provinces accounted for 82% of the total arrears

8. D EBT B URDEN CONT ’ D.. Presentation on Withholding of the LES to Municipalities As of February 2015 various Water Boards were owed a total of R 3.6 billion by municipalities – Of this debt, R 1.4 billion was current debt and R 2,2 billion was in arrears Sedibeng, Bushbuckridge and Botshelo Water boards were owed the largest amounts in terms of arrears debt, while Rand, Umgeni and Amatola Water boards were owed the largest amounts in terms of current debt

9. T HE A FFECTED M UNICIPALITIES In total 59 municipalities are affected by the National Treasury circular The majority (38 or 64%) are group B3 municipalities The Free State and North West have the largest numbers of affected municipalities, (22% apiece) Presentation on Withholding of the LES to Municipalities

10. T HE A FFECTED M UNICIPALITIES CONT ’ D. On average the LES allocations accounts for between 31% and 37% of their total operating revenue – this range masks extreme rates of LES dependency for some municipalities e.g. the ratio of the LES allocations to total operating revenue was 97% for Mopani District Municipality This huge LES dependency implies that the LES withholding would cripple operations and general service delivery Presentation on Withholding of the LES to Municipalities

11. I SSUES OF P RINCIPLE TO THE C OMMISSION Section 216 is a blunt instrument that hits the guilty and the innocent alike. Section 154 (1) of the Constitution prescribes support should be rendered to municipalities. Approach to debt should be fair and not one sided The debt issue should be resolved within the IGFR system and not in courts That compliance with the 30 day payment rule should not be enforced not only on municipalities alone but all government departments and entities,

12. I SSUES OF C ONCERN TO THE C OMMISSION Because there is non-clarity on the assistance/intervention rendered to affected municipalities prior to the LES withdrawal. Section 154 (1) of the Constitution prescribes support should be rendered to municipalities. That some of the municipalities affected by the LES stoppage are under administration. Who is accountable for the LES stoppage then? If National Treasury is misinterpreted as acting on behalf of government and non-government entities to collect their debt. That even some national and provincial government departments are not complying with the 30 day payment rule, (i.e. Section 38(1) of the PFMA (and Treasury regulations 8.2.3 (2001) and Treasury Instruction note No. 34)

13. R ECENT D EVELOPMENTS After the submission was made by the Commission a number of municipalities approached National Treasury to make payment arrangements on their debt Out of 59 municipalities initially identified for the withholding of their LES, 16 municipalities (as of 6/5/2015) have since approached National Treasury to negotiate payment terms The municipalities are spread over 7 provinces namely; EC, FS, KZN, LP, MP, NC and NW The tables in the following slides detail the payment arrangements they have made with National Treasury

14. R ECENT D EVELOPMENTS CONT ’ D.

15. R ECENT D EVELOPMENTS CONT ’ D..

16. R ECOMMENDATIONS Presentation on Withholding of the LES to Municipalities A proper diagnostics of the root cause of non-payment be done and if it is due to bad management, appropriate consequences should be rendered – Stricter measures should be imposed on individuals within municipalities that are responsible for continued flouting of MFMA rules. Municipalities must produce balanced budgets and in addition the electricity and water undertakings must be ring fenced. That IGFR forums dedicate sufficient time to find lasting solutions to the debt problems within the Local government sector.

17. R ECOMMENDATIONS Presentation on Withholding of the LES to Municipalities That executives for the relevant entities implement appropriate credit controls as allowed in law As the LES stoppage will affect the provision of basic services to poor households, the Commission would encourage that this be last resort and when proper diagnosis of the problem has been undertaken That National Treasury applies the same pressure to all national and provincial departments that are not complying with the 30-day payment rule The Commission would like to see a speedy conclusion of the work of the task team examining the intergovernmental debt.

18. T HANK YOU